What a franchisor selling franchise to Kazakhstan should know

What a franchisor selling franchise to Kazakhstan should know

Having substantial experience in advising a number of large franchise projects that appeared in the Kazakhstani market over the last years, we take the liberty of giving a number of simple but efficient recommendations to foreign franchisors.

When a foreign franchisor enters Kazakhstan, he normally uses its standard franchise agreement governed by (foreign for Kazakhstan) law which he is familiar with. But what he should do in the first place is to adapt the document to mandatory requirements of Kazakhstani law that contains ‘imperative’ provisions, which are effective irrespective of the law governing the agreement.

For example, there is a provision stating that a franchisor may not determine price for goods, works or services being sold by franchisee or establish upper or lower level of such price. This means that even if you entered into an agreement containing such a provision, the court would declare it invalid.

Franchise models may be based on determining consumer prices by a franchisor. And this is not prohibited by law of many countries (e.g. Russia). And when entering the Kazakhstani market, a franchisor would try to implement the same model, but would face limitations by local laws.

That is why, before sending a draft agreement to a potential franchisee, you should get advice from Kazakhstani lawyers to understand which of your standard provisions would work in Kazakhstan and which would not.

Another important aspect of which a foreign franchisor should think in advance is that as a rule, a franchise includes transfer of a right to use intellectual property objects, such as a trade mark or a service mark. Before you grant rights to a Kazakhstani franchisee, you should yourself obtain rights to those objects in Kazakhstan, such rights require registration. Accordingly, until you become a registered owner, legally you cannot grant a right to use a trade mark or a service mark in Kazakhstan.

That may entail very practical implications. For example, when a franchisee pays royalty to a franchisor under an unregistered right, it appears that the payment does not have legal grounds. Apparently, its lawfulness may be disputed by tax authorities or a bank’s currency controllers.

It should also be noted that under Kazakhstani law not only the right to a trade/ service mark itself but also a license agreement granting the right to use this IP object must be registered. This registration is possible only after the right to the IP object is registered.

Another consideration is that the registration procedures would take time. Registration of a trade mark in practice takes 8-12 months; registration of a license agreement under an already registered trade mark takes about 3-4 months. This timing should be taken into account in planning franchise projects.

One more important thing is a dispute resolution procedure in a franchise agreement. Foreign court decisions rendered in a vast majority of countries would not be enforceable in Kazakhstan. In Kazakhstan, foreign judgments are enforced only on the basis of reciprocity, and for that a treaty for reciprocal recognition and enforcement of court decisions is required.

Because of that, in dealings with a Kazakhstani franchisee, a foreign franchisor should not insist on jurisdiction of his country’s courts. At least, until he makes sure that there is such a treaty between our countries. Ignorance may lead to a situation where a court decision made in favour of a franchisor may appear simply unenforceable against a Kazakhstani franchisee. A solution is to include an arbitration clause in a franchise agreement that would allow enforcing arbitral award on the basis of one of the international treaties, such as the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

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